Repeated for your convenience: Marc Corporation wants to purchase a new machine for $400,000. Management predicts that the machine will produce cash sales of $275,000 each year for the next 5 years. Cash expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The company uses MACRS for depreciation. The machine is considered as a 3-year property and is not expected to have any significant residual value at the end of its useful years. Marc’s combined marginal income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments. A partial MACRS depreciation table is reproduced below. What is the TOTAL after-tax cash inflow in Year 1 from the proposed investment (rounded to the nearest thousand)?

The [term1] analysis is the widely used approach that managers use to recognize uncertainty about results of any models and to obtain an immediate financial estimate of the financial consequences of possible prediction errors due to the variance in the model factors/inputs. In the context of capital budgeting this means evaluating how sensitive are the capital budgeting decisions to various inputs such as tax rate, discount rate or timing of the cashflows (2 words, 1 point for each word, up to 2 points). (Hint: use the broadest term from the textbook that unites all potential techniques under this umbrella).

In my lectures I showed how to conduct “What-if sensitivity” analysis in Excel looking for the changes in the results, depending on the change of a single variable at a time. In particular, the exercise included the request in Excel to calculate a certain tax rate that would change the Net Present Value from an original amount to another precisely specified amount (e.g., $ 4,000). What was the name of the function that was used to conduct this type of sensitivity analysis?

The [term1] [term2] value of the project is the difference between the present value of future cash inflows and the present value of future cash outflows of an investment project (2 words, 1 point for each, up to 2 points).

The following table relates to two capital-budgeting projects of equal risk and reports the present value of the cashflows in the relevant periods. Which of the projects has the higher Profitability Index and will be selected if Profitability Index is used as the selection criteria?

Present value payback period is usually shorter than regular payback period.

If a company is in the situation of having unlimited capital funds, the best decision rule, considering only financial factors, is for the company to invest in all projects in which:

Repeated for your convenience (i.e., you can use the answers for the previous questions to answer the subsequent questions):Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce additional incremental cash sales of $200,000 each year for the next 5 years. The relevant incremental cash expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique’s combined marginal income tax rate is 40%.Management requires a minimum after-tax rate of return (i.e., discount rate) of 10% on all investments. Question 5. What is the net present value (NPV) of the investment?

Which of the following is the major, most important and difficult to overcome challenge for estimation of revenues (or benefits), costs and cash flows of a capital investment projects, especially for projects with long lives? (choose the best answer)

Below is the table of the after-tax cashflows for the project discounted at 10 % discount rate: What is the present value payback period in this case rounded to one digit (assuming 10 % discount rate)?